Clarus Securities analyst Noel Atkinson continues to look positively upon Gage Growth (Gage Growth Stock Quote, Chart, News, Analysts, Financials CSE:GAGE), maintaining a “Speculative Buy” rating and target price of C$5.50/share in an update to clients on Wednesday.
A Michigan-based vertically-integrated licensed cannabis company founded in 2017, Gage Growth operates nine retail locations with its Gage-brand products while also partnering with California cannabis brand Cookies to sell its products.
Atkinson’s latest analysis comes after Gage reported its second quarter financial results, including $26.4 million in revenue for the quarter, coming in just below Atkinson’s $27.5 million projection, though it still represents 50 per cent quarter-to-quarter growth for the company, which also crossed the $100 million annualized sales threshold for the first time in the quarter. (All figures in US dollars except where noted otherwise.)
Demand for Gage’s products and retail experience, along with the Michigan market, is stronger than ever. In fact, the state of Michigan reported $171 million of cannabis sales in the month of July. This establishes Michigan as the third largest cannabis market in the U.S., and the state may soon surpass Colorado to become the second largest market at its current growth rate,” said Fabian Monaco, CEO of Gage in the company’s August 24 press release.
“The Company currently operates ten dispensaries, three cultivation facilities with six contract grow cultivation assets operational, and has secured new multiple licensing partnerships with premium West Coast brands, including Pure Beauty and Wiz Khalifa’s Khalifa Kush. This capacity solidifies Gage as the leading operator with true scale in the Michigan market,” Monaco said.
Atkinson points to Gage having three additional stores come online, improved inventory supply across the retail portfolio, $2.4 million of wholesale (up from $500,000 in Q1), and $1.5 million of “exclusive supply arrangements” revenue with certain dispensaries as factors in the increase.
Gage’s adjusted gross margin rose 810 basis points from Q1 to reach 34.2 per cent to beat Atkinson’s 32.5 per cent forecast, while SG&A expenses, excluding $1.5 million of one-time costs related to the public listing, were slightly higher than the initial forecast.
Meanwhile, the company also reported a negative adjusted EBITDA of $2 million, missing Atkinson’s initial projection of a $1 million loss.
Michigan has proven to be a strong starting point for Gage, with ten locations across the state and another five in late development, with an additional five locations (three with pre-built stores and two pieces of land to build on), keeping a target of 20 retail locations by the end of the year in play with Atkinson assuming Gage will have 28 locations by the middle of 2022, with an aim toward opening its first location in Canada in the fourth quarter of this year.
“Gage has grown furiously over the past 18 months and reached the $100 million/year (annualized) sales threshold in Q2,” Atkinson wrote. “We now assume most of the next 10 stores will open by mid-Q4, a bit longer timeline than before. Our Q3/21e revenue stays intact as we expect more wholesale revenue contribution, but we have softened our Q4 forecast. We remain optimistic on Gage’s prospects in 2022, driven by the expanding retail portfolio and the launch of meaningful wholesale shipments.”
Gage’s most recent financial reports have led Atkinson to modify his upcoming quarterly projections, though he still expects the third quarter to be Gage’s first with positive adjusted EBITDA (US$500,000) compared to US$31.6 million in revenue.
Atkinson has also pushed some of his annual projections further in the future, as he has reduced his revenue estimate for 2021 to $114.5 from his initial projection of $123.3 million, though the revised figure still represents a 187 per cent potential year-over-year increase from 2020, with 2022 now forecast to hit $277.8 million in revenue instead of $275 million, a potential year-over-year increase of 143 per cent.
Atkinson’s revised estimates show Gage looking at one more year of negative adjusted EBITDA ($800,000) compared to his initial projection of $6.8 million positive adjusted EBITDA, though he now has 2022’s adjusted EBITDA projection set for $73.7 million, beating his initial analysis of $72.7 million and producing an adjusted EBITDA margin of 27 per cent.
Atkinson’s valuation data also paints a positive picture for Gage, projecting a 4.4x EV/Sales multiple for 2021 before dropping to a projected 1.8x for 2022, which is also when Atkinson has a positive EV/EBITDA multiple (5.4x) and price-earnings ratio (21.6x) coming into focus.
With Gage’s target EV/adjusted EBITDA multiple over the next 12 months is 15x and higher than its peer group, Atkinson believes the picture will become much clearer for Gage and its competition.
“We expect the entire sector to enjoy a rebound in valuations as federal regulations are inevitably relaxed (given the high level of public support for cannabis legalization and for protections for state-regulated cannabis programs),” he said. “We also believe our target multiple is reasonable given our expectation for Gage to achieve very strong organic revenue growth in 2021 and 2022 and that it should become a leading vertically-integrated operator (by retail locations and revenues) in Michigan by late 2021 or early 2022.”
Overall, Gage’s share price is down 18 per cent since going public in early April, but has gone up 18.5 per cent since bottoming out at C$2.00/share on April 22. At press time, Atkinson’s C$5.50 target represented a projected one-year return of 104.1 per cent.